In our last article we briefly covered how Fractional reserve Banking (FRB) works to result in an increased money supply – inflation. The current article looks at how this inflation results in higher prices of goods and how it acts to transfer wealth.

Because economics is about people, and our Prime Minister emphasised this in her speech on Wednesday, which was not a State of the Nation speech but a speech about the next 100 days of a Labour-led government. In her speech, Prime Minister Ardern noted that she has asked the Finance Minister to accelerate the work the Treasury has begun on establishing a Living Standards Framework. This is a clear signal of a behaviour change in policy and investment decisions, and one that BERL welcomes.

At the beginning of this year it was widely expected that, having spent five years below the Reserve Bank’s 2% target rate, inflation would start to increase. And, lo and behold, it did. In the March 2017 quarter, the annual rate of increase in the CPI reached 2.2%.

The good news from the GDP data for the March 2017 quarter was of continued growth, with expansion of 3.1% for the year confirmed. However, the good news hid the rather sobering news of the export sector contracting for the third consecutive quarter. Consequently, exports for the March year reportedly grew by a meagre 1.2%, as meat, textiles, and metal and machinery products all slumped with sizable negative growth recorded.

Taking the definition of inflation as an increase in the price level of goods and services that the Reserve Bank of New Zealand (RBNZ) uses. And combined with the Policy Targets Agreement (PTA) which specifies that this measure should remain at 2% on average we could be forgiven for thinking inflation is a non-issue right now.

The widely expected OCR cut was not the most significant aspect of September’s Reserve Bank Monetary Policy Statement. The far more significant aspect was the somewhat jaw-dropping downgrade in the economic forecast picture that the Reserve Bank now paints.

Statistics New Zealand (Statistics NZ) recently announced the results of its 2014 review of the Consumers Price Index (CPI). Statistics NZ undertakes a review of the CPI every three years in order to ensure that the CPI basket of goods and services accurately reflects the main items and services New Zealanders buy. This way Statistics NZ can accurately calculate price changes each quarter.

This note assesses whether progress has been made towards rebalancing the underlying structure of New Zealand’s macroeconomy. We explore five influences driving New Zealand’s macroeconomic imbalances – tradable sector activity, the burden of inflation control, net external trade receipts, expenditure in the domestic sector, and the direction of finance.

The latest food price data release confirms the ongoing decline in food prices. November data shows food prices have been below year-earlier levels for six out of the last seven months, with October being the only exception.

From October 2011 to October this year, food prices have risen 0.3 percent. This is the first rise in food prices since April this year. The main driver behind this rise was increased fruit and vegetable prices.

Food prices eased in September, down by 0.9 percent on the previous month and 0.3 percent on the same month last year. This is consistent with international prices, which are down 4.1 percent on the year. Prices are expected to recover along with the global economy, but also because of unfavourable growing conditions in India, Europe and the US.

Food prices increased marginally in August – by 0.1% according to Statistics New Zealand’s latest release of its food price index. The most significant increase came from fruit and vegetable prices, which were 1.5% up in August. Prices for fruit and vegetables tend to rise in winter months and have been rising month on month since April.

GDP grew 1.1% in the three months to March 2012, taking annual growth to 2.4%. The figure was a positive surprise, incorporating conservative growth in primary and manufacturing industries and nearly flat domestic spending. Looking at the detail however, the quarterly figure was helped by a large increase in the statistical discrepancy. Without this contribution growthbin the March quarter would have been a more modest 0.6%.

According to Statistics New Zealand’s latest food price index, overall food prices in March were down 1 percent compared to February. In addition, prices were down for all five broad categories: fruit and vegetables, meat, poultry and fish, grocery food, restaurant and ready-to-eats, and non-alcoholic beverages.

The farm-gate value of dairy, sheep and beef products grew by 58% from $10.2 billion in the 2006/2007 season, to $16.3 billion in the 2010/2011 season – but greater investment in pasture renewal could have boosted growth even further.

The Capital Goods Price Index rose 0.4 percent in the December 2011 quarter, taking the annual increase to 1.1 percent. This slight upward trend follows a very subdued period where the index remains at the same level as the June 2009 quarter.